Taking stock

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During three weeks of hardship duty on a Caribbean beach, I had the opportunity to observe the world from sufficient a distance to be able to, to a certain extent, distinguish the forest from the trees.

In January we were still marvelling at US stock markets, which were not only setting new record highs but also an unprecedented run of days where the principal indices had not moved by more than 1% in a single session. Now, just six weeks on, it’s rare to find a day when markets have not moved by at least 1% and our old friend the Dow Jones Industrial Average is struggling to remain in positive territory, year-to-date. All the while talk of central banks becoming more hawkish abounds – Jay Powell’s first Humphrey-Hawkins testimony was taken to reflect that – but in truth bond markets remain remarkably sanguine.

For younger players in global bond markets a rise of something in the region of 50bp in the yield of the US 10-year note since the beginning of the year might seem apocalyptic but fat old dinosaurs like myself lived in a time when we’d do that kind of move in a day and still be down the pub at 5pm. In a similar timeframe – two and a half months - from the beginning of August to the middle of October 1987 the 10-year yield rose from 8.85% to 10.25%. But away from the volatility which everyone wanted when it wasn’t there and moans about now that it has returned my observations from a distance have highlighted other trends that make it all feel very 20th century.

Poll dancing

China’s President Xi Jinping is taking the country back to being a one-leader dictatorship. As the saying goes, he’s in favour of one man, one vote; he’s that one man and he has that one vote. Vladimir “put-me-in” Putin has already executed that trick in Russia. The West is going populist too. Young macron was carried into the Elysee Palace last year by voters who turned away from the established parties. Mutti Merkel might have compromised herself back into the Chancellery but at what price while it should not be forgotten that the AfD, never mentioned in polite company, remains the third-largest party in the Bundestag. Now, in the Italian elections, the centre-left has been all but wiped off the map. The crisis is more deeply rooted than we generally acknowledge for it was the great powers of centripetal politics, the Mitterands, the Kohls and the Delors of the world who formulated the prevailing core tenets of the grand European project that are now faced with the centrifugal effects that mass migration and the perceived systematic attack on national identity are releasing.

I see much of the blindness of the late 1920s and the early 1930s taking hold again. While convinced that the devastating effects on society of the ‘war to end all wars’ would guarantee that it could not happen again, the forces of fascism rose to the surface more or less unhindered. It is generally acknowledged that any society with a birth rate of below 2.0 is in decline. In France, immigrant groups excepted, it is 1.7. In Germany it is 1.5, in Italy only 1.3. In the US and the UK it is pegged around 1.7. The divergence in birth rates between indigenous and immigrant populations is still rising and this is quite naturally reflected in the collapse of consensus politics.

Market stalls

But what about markets? It would appear that they are rudderless, that they are scrambling around trying to work out which side is up. On holiday I read Patrick Bishop’s outstanding book on the men who flew for the RAF during the Battle of Britain titled “Fighter Boys”. In it he explains that anybody could fly a plane is a straight line but that it took more to weave and wind and fly upside down and still not lose orientation. It then took another level of talent to do all of that while firing at an enemy and avoiding being shot down. The markets are in many respects similar. Anyone can make money by being long in a rising market. Only few can do so when faced with the prospect of a repricing of assets in a rising interest rate environment. That’s the flying upside down bit. Trying to hit the enemy at the same time is adding the uncertainty of the reshaping of the global political landscape. Finally, the fourth element of trying not to be shot down is dealing with the curve balls that are pitched at markets with monotonous regularity by President Donald Trump and his Twitter account.

Today sees the beginning of the Geneva Motor Show. Normally this is petrol-head heaven, which neatly coincides with bonus cheques being banked. But today is not normal. The twin-barrel attack by the White House on trade in steel and now cars will make many meetings held in Geneva more relevant than those attended in Davos. In some respects, especially in the automotive space, Trump does have pertinent ammunition. The levy on cars moved from Europe to the US market is 2.5%. The tax on vehicles going the other way is 10%. Other non-tariff impositions hurt the west-to-east movement of vehicles even more. In other words, the playing field truly isn’t level. That said, if the Yanks ever made the effort and subsequently succeeded in creating a line of products that met the demands of European car buyers, both technically and in build quality, there might be a market for them, import duty or no import duty.

The tit-for-tat imposition of putatively punitive tariffs, for which Trump has fired the opening salvo, benefits no one – I hope Michel Barnier takes this lesson into the Brexit negotiations – and Trump’s assertion that trade wars are easy to win rings as hollow as the 1914 assumption that the boys will be home by Christmas. That markets don’t know how to price the shifts in relations we assumed to be axiomatic and which are under attack is not surprising. What has changed from the past, however, is that they once ran for cover at the first sign of stress. Since the robust response by the central banks, first to financial crisis and then the eurozone crisis, they now seem to blithely assume that whatever happens in the macrosphere, monetary authorities will make sure that the damage to markets is not too severe.

Thus neither a totally inconclusive Italian election outcome nor the threat of a damaging trade war between the US and the rest of the world seems to have significantly impacted markets by more than just a spot of day-to-day volatility, if at all. This might one day change but for the moment long remains the new neutral and neutral is tantamount to being the new short. Short, it appears, no longer exists. But in the words of Charles Dickens in The Pickwick Papers, never say never.

It’s good to be back, especially having missed the Big Freeze. Now bring on spring.